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Weekend: The Forecast Calls for Pain

Written By Brian Hicks

Posted June 11, 2011

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

Hot and steamy on the streets outside my office, summer has suddenly arrived in a dripping swelter. Unfortunately, the same thing can’t be said about today’s markets…

They remain ice cold in a way that only a bear could love.

Since topping five weeks ago, the broader markets are down by nearly 6%.

That has brought out forecasts for even more pain, as everyone looks at the end of QE2 wondering whether or not it will spin off another market tornado…

One of these forecasters is Richard Russell who, over the last 50+ years, has seen his fair share of market-related weather.

Rising long before dawn, Russell has seen practically every tick of the markets as the author of The Dow Theory Letter, the granddaddy of them all. Amazingly, he has never missed an issue.

On top of that, Russell survived the Great Depression, the Battle of Normandy, a heart attack, a stroke, and a motorcycle accident.

Oh, by the way, he also managed to make one of the greatest market calls of all time — the legendary 1974 bottom. As everyone else was headed for the exits, Russell was calmly wading in. That was after calling the top of the market in 1966.

So when this guy has something to say about the market, most people are willing to listen.

His current forecast is admittedly mixed, since in last week’s letter he wrote, “Frankly, it’s difficult to envision a bear market in the face of what my PTI [Proprietary Technical Indicator] is doing.”

However, Russell also noted the following, which earned him a place in the headlines:

The whole current mess reminds me a lot of 1929-30. After the crash of ‘29, the stock market roared higher, even as the economy was simultaneously weakening.

When the great post-crash rally died in April 1930, the market turned down with a vengeance, and the Great Depression began.

The market is probably now in the process of forming a complex top. If the market now turns down convincingly, we could see the beginning of Great Depression No. 2.

There’s that term “Great Depression” again — this time used by Russell as an ominous warning. It seems to haunt us like an unwanted ghost.

In a recent CNN poll, 48% say another Great Depression is likely to occur in the next year. That’s the highest number this gloomy forecast has ever reached.

“That’s not just economic pessimism,” says CNN Polling Director Keating Holland. “That’s economic fatalism.”

Of course, the White House has called the most recent gloomy data a mere “bump in the road to recovery”, but we know otherwise. It’s bigger than a bump.

The economy would have to create 250,000 jobs a month until March 2016 to just get back to 2007 employment levels. That’s a forecast that isn’t on anybody’s radar. What’s more, GDP is softer than it appears…

You see, the BEA used a 1.9% annual inflation rate as the price deflator for Q1 GDP this go-round, when we all know the inflation rate is much higher. That allowed the government to print an anemic 1.84% growth when the reality was much worse.

In fact, using the higher/actual price deflator of 3.2%, GDP was actually closer to .56% on an annualized basis…

That is how close we are to a double dip. You can feel it in your bones.

As for a way to protect yourself from these brewing storms, our editors have put together a few of their best ideas for the years to come in our past week’s Wealth Daily and Energy & Capital articles, below.

You see, even in the worst bear markets, there is still money to be made.

That’s the sunny upside for investors who really know how to read the clouds.

Your bargain-hunting analyst,

 steve sig

Steve Christ
Editor, Wealth Daily

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